My Mythical Online Rental Service for Movies

Why Hollywood is so slow to catch up on offering all of its movies and shows online.

I've been watching most of my movies and a lot of my TV shows through Netflix for at least three years now. But lately my red envelopes have been piling up; I've gone weeks without watching anything on DVD. That's because the superfast Internet connection that my apartment building recently tapped into gives me immediate access to just about every recent movie or TV show I'd care to watch. I can download an hourlong show in less than 10 minutes; a movie takes about 15. I can watch these on my computer or—with a DVD player that accepts USB thumb drives —on my TV.

I would gladly pay a hefty monthly fee for this wonderful service—if someone would take my money. In reality, I pay nothing because no company sells such a plan. Instead I've been getting my programming from the friendly BitTorrent peer-to-peer network. Pirates aren't popular these days, but let's give them this—they know how to put together a killer on-demand entertainment system.

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I sometimes feel bad about my plundering ways. Like many scofflaws, though, I blame the system. I wouldn't have to steal if Hollywood would only give me a decent online movie-streaming service. In my dreams, here's what it would look like: a site that offers a huge selection—50,000 or more titles to choose from, with lots of Hollywood new releases, indies, and a smorgasbord of old films and TV shows. (By comparison, Netflix says it offers more than 100,000 titles.) Don't gum it up with restrictions, like a requirement that I watch a certain movie within a specified time after choosing it. The only reasonable limit might be to force me to stream the movies so that I won't be able to save the flicks to my computer. Beyond that, charge me a monthly fee and let me watch whatever I want, whenever I want, as often as I want.

Sound like a lot to ask for? In fact, it's pretty much the same system that Netflix has been offering with DVDs for years. I'm only calling for someone to give me all the splendors of Netflix, but through the Web. Netflix proves that even if you give people unlimited subscriptions, they'll still watch only a handful per month. My guess is that the same sensibility governs online rentals. Sure, a few uninspired people will sit around streaming movies every spare moment, but most of us have too much to do to abuse an unlimited subscription, even when we cut out the postal service as the middle man.

But it is reasonable to charge more for the convenience. Netflix's current three-at-a-time DVD plan goes for $17 a month. Theoretically, you can get up to about 22 movies a month through the plan, which means you're paying at least 75 cents or so per movie; most people, of course, get far fewer, and thus pay a lot more per movie. (You can see how much you've been paying by analyzing your Netflix rental history.) I'd be willing to pay twice as much for the convenience of getting everything without having to wait for the mailman. About $35 to $40 strikes me as reasonable; I bet that at that price, millions of people will sign up.

The current offerings are nowhere close to this dream service. Netflix's Watch Instantly streaming plan offers a smattering of popular new releases and a slightly wider selection of films from the '80s and '90s. Watch Instantly often feels like Settle-For Instantly, since many of the titles are of the airline-movie variety. Apple's iTunes rental plan, meanwhile, sits at the other end of the spectrum: It offers a wide selection of new releases that go for $3 or $4 each, but it's crippled by a surfeit of restrictions. After you press play, you've got just 24 hours to watch the full film, and new releases tend to disappear off the virtual shelf after a few months as they enter a new circle of Hollywood's contractual purgatory.

So why won't anyone in Hollywood build my service? The reason isn't stupidity. When I called people in the industry this week, I found that many in the movie business understand that online distribution is the future of media. But everything in Hollywood is governed by a byzantine set of contractual relationships between many different kinds of companies—studios, distributors, cable channels, telecom companies, and others. The best way to understand it is to trace what you might call the life cycle of a Hollywood movie, as Starz network spokesman Eric Becker put it to me. We all understand the first couple of steps in this life cycle—first a movie hits theaters and then, a few months later, it comes out on DVD. Around the same time, it also comes out on pay-per-view, available on demand on cable systems, hotel rooms, airplanes, and other devices. Apple's rental store operates under these pay-per-view rules, most of which put a 24-hour limit on movies. The restriction might have made sense back in the days when most people were getting on-demand movies in hotel rooms and the studios didn't want the next night's guest piggybacking on rentals. It doesn't make much sense when you're getting the movie on your MacBook. But many of the contracts were written years ago, and they don't reflect the current technology.

A movie will stay in the pay-per-view market for just a few months; after that, it goes to the premium channels, which get a 15- to 18-month exclusive window in which to show the film. That's why you can't get older titles through Apple's rental plan—once a movie goes to HBO, Apple loses the right to rent it. (Apple has a much wider range of titles available for sale at $15 each; for-sale movies fall under completely different contracts with studios.) Between them, Starz and HBO have contracts to broadcast about 80 percent of major-studio movies made in America today. Their rights extend for seven years or more. After a movie is broadcast on Starz, it makes a tour of ad-supported networks (like USA, TNT, or one of the big-three broadcast networks) and then goes back to Starz for a second run. Only after that—about a decade after the movie came out in theaters—does it enter its "library" phase, the period when companies like Netflix are allowed to license it for streaming. For most Hollywood releases, then, Netflix essentially gets last dibs on a movie, which explains why many of its films are so stale.

Couldn't the studios just sign new deals that would give them the right to build an online service? Well, maybe—but their current deals are worth billions, and a new plan would mean sacrificing certain profits for an uncertain future. Understandably, many are unwilling to take that leap.

This is not to say there hasn't been any progress. Last year Netflix signed a deal with Starz that allows it to get access to relatively new releases from Disney, Sony, and their subsidiaries. As a result, subscribers have lately been seeing some bigger movies on Watch Instantly—Superbad, Ratatouille, No Country for Old Men, and others. But this deal has its problems, too: As Becker explained, these movies will stay in Watch Instantly for only about 18 months; after that, they'll go to ad-supported TV networks, and Netflix will lose the right to stream them.

Does all this sound confusing? It should, because it is. And working through these contracts in order to build the perfect streaming service will take time. Reed Hastings, Netflix's founder, told the Hollywood Reporter last month that it'll be 10 years before we see a streaming service that offers any movie at any time.

For the studios, that's terrible. Just like in the music business, eventually the entire home-video market is sure to move online, and many consumers will abandon pirate sites in favor of easy-to-use legal services. The music industry lost a lot of money when it dithered over this transition, and now the movie business seems to be making the same mistake. It could be raking in a lot of cash by selling us easy online rentals. Until it works out a plan to do so, there's always BitTorrent.

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